MTG Trading Journal

Recently we switched the format of our Real Time Room from exclusively daytrading ETF's to daytrading of individual stocks. We have decided to start a journal here highlighting some of the plays that may have educational value. Those of you who are familiar with our other thread "Why Actively Trade ETF's" will be familiar with the style of trading. Essentially we trade relative strength. We use a top down approach, to analyze what the broad market is doing first, then find out which sectors are strong or weak relative to the broad market. Trades are then initiated in the direction of broad market and/or sector strength or weakness. Generally our style is low-key with no more than 3-4 trades on an average day.

Today we noticed that as the broad market was chopping around within the first hour, the $OSX (Oil Services Index) was basing at its lows and was showing relative weakness to the broad market. The following two charts illustrate this divergence:

As you can see from the two charts above, the Oil Services Index was showing relative weakness to the broad market at around 10:15 this morning. A scan of some Oil Services stocks brought our attention to Baker Hughes (BHI) as a short setup within the sector.

We entered BHI on the short side from 29.14 in the circled area above. A physical stop was placed at 29.25 just over the 50ma. Our first target was the whole number 29, where there was some intraday support from yesterday as shown by the black line to the left. After covering half of our position at 28.97, BHI experienced further weakness and fell down to its 200 period moving average (blue line). We covered the rest at 28.78 due to the support of the 200. We find the 200 period moving average to be extremely powerful on ANY timeframe. As you can see from the price action following the test of the MA, BHI used it as a springboard to recover some of its earlier losses. We were out with an average gain of +.26 on the whole position.

This trade is indicative of our style of play intraday. For the sake of brevity, subsequent posts won't include snapshots of the broad market and sectors. We'll just post annotated charts of the individual stocks themselves. Intelligent commentary on daytrading relative strength is always welcome.

In scanning the various sectors that we trade, we noticed that the $XBD or Broker-Dealer index was very relatively weak to the market all day. In the afternoon we selected Merrill Lynch (MER) for an entry on the short side. Following is an annotated chart of the setup.

We shorted half of MER @ 56.03 anticipating the break of support at the black horizontal line. A second half was set as a sell stop to trigger at 56.90 just below support. We covered half the position at the lows at 56.58 and scaled the rest out around the .65 area.

I don't know if it was in anticipation of the Feds comments due tomorrow afternoon at 2:15, but the $BKX (banking index) was absolutely on fire today. The index was showing relative strength to the broad market all day. As such we selected Citibank (C) for a trade on the long side. The setup and trade follows.......................

After a nice runup on good volume in the first 15 minutes of trading, we noticed that C did not pullback at all when the market began to chop around. We entered half position C @ 46.92 and another half soon after at 46.94. We scaled out in 3 portions, ultimately selling our last piece at 47.11 as prices approached the 200 MA which as you can see held Citibank to only 3-4 more cents gain once this all important MA was tested.

The broad markets have been the choppiest we have seen intraday in a long time. Relative strength is the key to being consistent when the market is not showing its hand and reversing on a dime multiple times during the session.

I would very much like to also see a bad trade-- how you recognize it's not going well and how you get out of it.
Thanks,
Pete

More...

ok Pete, here's one from today.................

Internet index was very weak all day. Had the $gin at the bottom of my sector minder for most of the morning. Took Ebay from the short side and the following happened..........

Shorted EBAY at 55.14 at point 1 on the chart on the formation of that very bearish candle. A stop was set at 55.40. Its not shown on the chart above, but at 55.38 is the 200 period moving average on the hourly of EBAY, so I figured right there was perfect spot for a stop.

EBAY then breaks the lows by less than 5 cents and starts to rally back upwards. Sensing that something is up when the break to new lows did not bring in more sellers, I covered half at 55.11 to scratch the first half of the trade and reduce risk. The highs of that candle (2.) were exactly 55.38. My stop was not taken out and at this point I am confident that it is in the right place as EBAY sells off back to the lows again. Notice also that candles 1. and 2. are bearish topping tails. So that also gave me confidence that the stop would not be hit.

This rather volatile internet player then breaks the lows again by about a nickel and before I can lower the stop rallies back again and takes out my original stop at the .40 level (point 3 in the chart). I call this "pattern failure" when the tails to the upside do not follow through with further selling and another meaningful leg downward. So, all in all I was out for an average of (.12) loss on the full position.

FWIW, you asked for a "bad trade". A bad trade is one where you do not follow your rules, or your analysis of the situation was just completely wrong. Neither was the case here. I shorted a weak stock in the weakest sector on the day. Just got stopped out on some chop is all. Happens every day to everyone. Its all in how its managed. Whenever stop outs occur and you can sincerely say to yourself that if given the same set of criteria you would do the trade over again the same way, then there is no internal conflict whatsoever. You take the loss as a business expense and move on to the next trade......

(1) take trade setup;
(2) mixed signals about how the trade is going: get smaller;
(3) hit the stop --> still gave the smaller size a full chance;
ok because the stop placed properly;
(4) don't second guess and re-short
(5) no "woulda shoulda coulda" about the drop after stopping out; exit was proper; what happens after irrelevent

Although trading intraday relative strength of sectors and stocks is our modus operandi, it never hurts to have a few more tools in your toolbox, so to speak. On Wednesday, December 17th, Amazon and other internet stocks (which we track using the Goldman Sachs Internet Index, or $GIN) were showing relative weakness to the broad market. Although this information alone would have been enough to start looking for short setups within the sector, it was actually a daily of AMZN that alerted us to a possible break in the e-tailer. A daily chart of AMZN is below.

Notice how the stock formed hammers on the daily charts at the support area in the black circle. It was evident that any break below the bottoms of those hammers would bring in some sellers as former bulls are now disappointed that the lows of the day before and four days ago did not hold......

Drilling down to the 15 minute intraday chart above, shows AMZN basing below the prior support line and setting up a bear flag
pattern. Knowing that the stock is already weak to begin with and has been sold off below support on the dailies, makes the odds of AMZN following through to the downside that much greater. Confirmation of the $gin being one of the weakest sectors on the day, set up AMZN for a short entry at 47.90. We scaled out of our position piecemeal with the last portion covered at 47.02, just pennies off of the low of the day. Our average exit price was 47.23 for a gain of .67 on the whole trade.

The following chart illustrates the head and shoulders pattern that has been forming in the $DJUSHB (homebuilders index) for some time now.

The head and shoulders pattern is formed when after a protracted advance, a last high is made which marks the top, or "head" of the pattern. After a sharp pullback, another advance ensues which is weaker than the previous and prices cannot reach the peaks of the last move. When this last move begins to stall and form the first set of lower lows or "right shoulder", its time to initiate shorts. Most of the homebuilders stocks were exhibiting the same pattern as the index on their dailies. Swing opportunities abounded recently in many hombuilder stocks such as TOL, RYL, BZH, HOV and others. We shorted Centex Corporation (CTX) on Monday, December 29th. A chart of the setup is below:

We entered the CTX swing short at the top black circle at 110.89. Over the next 3 days, CTX sold off and we were able to cover most of our position into weakness at the 105 area, netting us over 5 points in profit. Currently we are still short a small position in CTX with a trailing stop at 104.80 which will guarantee us +6.09 points on the remaining position even if stopped out. We will continue to trail our stop lower every day if there is continued weakness.

In addition to shorting some homebuilders early on today which followed through on Friday's weakness, this retail trade came up in early afternoon that had so much going for it it was just screaming to be entered..........

As the $RLX (Retail Index) was basing at the lows, Auto Zone (AZO) was making the following setup......

AZO rallied to its 200 period moving average on the 15minute chart where its 20 ma was also over head. We entered short at 83.87..................................

Two thirds of the position were covered at 83.45 where prior support was earlier in the day. On further weakness we were able to cover the other 1/3 at 83.06 and 82.66 for +1.21 on the final portion and a weighted average gain of +.66 on the whole trade.